The Liberal Democrat MEP
for southeast England now cites unfinished business: killing
off the concept of too-big-to-fail banks, fixing holes in
bank-resolution plans, addressing regulatory turf wars, and
ensuring oversight of the European Central Bank as it assumes
extraordinary supervisory powers next year.

In an interview with
Euromoney, she says: "Although the European Parliament in the
end did not vote for a super-Sifi surcharge [a proposed 10%]
and has gone in line with the Financial Stability Boards
recommendations [an extra 1% to 2.5% of core tier 1 capital],
Sifis are set to pay for an insurance premium and it might be
an incentive for banks to downsize to a lower Sifi given the
attraction of having to hold less capital."

Bowles makes a bold
claim: markets and policymakers are increasingly prepared for
the collapse of a large cross-border universal banking group
without triggering a financial Armageddon akin to the
post-Lehman maelstrom.

"The chances of some big
bank in Europe failing, where everything is disorganized, is
progressively getting less and less likely. There is a general
agreement about bail-in legislation. We are getting into a
situation where banks are submitting group-resolution plans to
authorities."

Sharon Bowles wants greater control of the
ECB

Regulators, however, have a credibility problem. Although
rating agencies note the lack of political appetite to
socialize financial losses, the big-three raters still, almost
mechanically, upgrade large banking groups on the back of
implicit sovereign support, while spreads on senior unsecured
bank bonds have not materially repriced on the back of extra
credit risk, even after the Cyprus bail-in sped up
banking-union efforts and the BRRD legislation. Whats
more, Denmark, the Netherlands, and Sweden have introduced the
BRRD at the domestic level, without triggering a downward
ratings spiral of their banks, while the reluctance of Dutch
policymakers to enforce a bail-in of senior debt at SNS bank in
February 2013 highlights policymakers fears over the
market fallout of using all the resolution tools at their
disposal.

Bowles says governments
should have limited flexibility in using the senior bail-in
tool to boost ex-ante clarity on creditor hierarchy. Although
the bailing in of junior bond holders and 8% of a given
banks total funds and liabilities will be a prerequisite
of EU state aid rules under BRRD when it becomes operational,
possibly as early as 2016, some analysts note flexibility with
respect to the bail-in of senior bondholders in the resolution
text.

This ambiguity appears to
confirm investors fears that bank resolution will always
be effectively a game of second-guessing regulators
intentions, rather than having ex-ante rules. "The parliament
is much more wedded to having a presumptive path, whereas the
member states, treasuries and supervisors are looking for a lot
more flexibility," says Bowles. She adds: "Cyprus was a bit of
a disaster because they kept on changing their minds. We need
clarity."

Bowles says challenges,
including different corporate bankruptcy codes, still undermine
the banking-union project. "Its still very difficult that
even under a banking union, a bank will have assets owned in
different member states and we still dont have tools that
can command the transfer of those assets from one country to
another."

Bank resolution plans
remain a work in progress, but have been complicated by the
push among some European supervisors to ring-fence liquidity
and capital within domestic borders, and divergent structural
banking reform proposals in the UK, France and Germany.

Bowles holds out little
prospect for harmonization of bank-structural reforms in the
near future. "We have not had the proposal on bank structures
from the [European] Commission. There is no hope of that
happening anytime soon. There should be an overriding principle
that whatever reforms you embark upon, it should not damage the
common market. In other words,
you should not ring-fence within the EU, but perhaps
ring-fence EU banking groups," she says, raising the spectre of
an EU/US regulatory spat.

Bowles describes the
fragmented regulatory backdrop of an upcoming Federal Reserve
surcharge on large foreign banks US operations and swap
rules that favour US operations. "We are fighting back against
the US for the EUs interests on a couple of regulatory
matters," she says. "But although everyone is complaining about
turf wars, in truth, regulators have never cooperated globally
on this scale before."

Further reading on Euromoney

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